1 Odyssey's Quarterly Newsletter – Q2 2018 In this Newsletter 2017 Hedge Fund Bonus Numbers are in Analysts were optimistic – and they were right The Art of Thinking Independently Together Hiring for diversity of background and diversity of thought Hiring non-U.S. Employees How firms are thinking about visa sponsorship The Keys to Differentiation for Private Credit What firms are doing to use up all that dry powder Landing Your Top Choice Candidate How to get the person you want into their seat “Civilization is the encouragement of differences” – Mahatma Gandhi As we move into the second quarter of 2018 we tackle how some of the key issues of the day – diversity and immigration – are being tackled in the investment management space. We do a deep-dive into how we see private credit firms growing. As the recruiting market continues to heat up, we share our tips on how to land your number one pick candidate. And we start off with the summary results of our Q1 2018 compensation survey that looked into year-end bonuses. Happy Spring. The Odyssey Search Team Hedge Fund Moves Note: We came across these moves in the course of our business; they do not include Odyssey placements, respecting the confidentiality of our candidates and clients.
Transcript
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Odyssey's Quarterly Newsletter – Q2 2018
In this Newsletter
2017 Hedge Fund Bonus Numbers are in Analysts were optimistic – and they were right
The Art of Thinking Independently
Together Hiring for diversity of background and
diversity of thought
Hiring non-U.S. Employees How firms are
thinking about visa sponsorship
The Keys to Differentiation for Private
Credit What firms are doing to use up all that
dry powder
Landing Your Top Choice Candidate How
to get the person you want into their seat
“Civilization is the encouragement of differences”
– Mahatma Gandhi
As we move into the second quarter of 2018 we
tackle how some of the key issues of the day –
diversity and immigration – are being tackled in
the investment management space. We do a
deep-dive into how we see private credit firms
growing. As the recruiting market continues to
heat up, we share our tips on how to land your
number one pick candidate. And we start off with
the summary results of our Q1 2018
compensation survey that looked into year-end
bonuses. Happy Spring.
The Odyssey Search Team
Hedge Fund Moves
Note: We came across these moves in the course of our business; they do not include Odyssey placements, respecting the
confidentiality of our candidates and clients.
2
Results of Q1 2018 Hedge Fund Investment Professional
Compensation Survey
At year-end 2017, hedge fund investment professionals predicted that they were going to receive a 2017
bonus 39% higher than their 2016 bonus (as described in our Q42017 Compensation Report). Surely this
was optimistic? A case of wishful thinking before the holidays? Hadn’t they read a newspaper recently
about the hedge fund industry and understood what was going on with assets and fees?
So earlier this year, we went back and surveyed the same 1,000 people about their actual bonus
numbers. The overall findings are now in. Turns out the analysts weren’t off by a lot. The average hedge
fund investment professional saw an actual 28% lift in 2017 vs. 2016 year-end bonuses, as illustrated
below.
All Front Office Investment Professionals Compensation
There are three main reasons to explain this:
1. Positive average 2017 fund returns generated significant performance fees in addition to management fees.
2. The return of confidence within hedge funds has heated up the market for top talent between funds, driving up the cost of retaining key investment professionals.
3. The strength of the wider economy has created additional competition, with the fields of technology, private equity and private credit in particular looking to hire similar candidate profiles.
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When we take that 28% average year-on-year bonus increase and break it down by experience level, we
see that the biggest year-on-year bonus % increases were at the junior level. The biggest dollar increases
were at the mid/senior level, however, as illustrated in the table below.
So, were people happy with the increases? Not particularly. On a 100 point scale, with 0 representing
“extremely unhappy” and 100 being “audience reaction to Black Panther”, respondents were pretty much
in the middle. But juniors were the most satisfied and everyone was happier than after full year 2016!
It’s worth pointing out that we’re able to collect this information because people are sharing it with us
unrelated to any employment opportunities. The results are anonymized and only shared in the
aggregate. But in this age where employers (and agencies representing employers) cannot ask a given
candidate for historical compensation given the new laws, we hope you find this data particularly
valuable.
Finally, we’re currently finalizing the analysis where these compensation numbers will be broken down by
other variables including investment strategy, geography, fund size and performance etc. If you’re a client
and you’d like to receive a complimentary copy of the 2018 Compensation Report, please let us know.
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The Art of Thinking Independently Together
That's how the writer and entrepreneur Malcolm Forbes described diversity. It's a topic that is receiving a
lot of attention, including within the finance industry. First off, what is meant by diversity in financial
services? For many, it goes beyond under-represented minorities, though that certainly is a part. One
firm, Point72, takes a stab and explains on their website "We've attracted talent representing different
majors, genders, geographical locations, and nationalities..."
Why make the effort to increase diversity? For many, it just "feels like the right thing to do," particularly in
this era of political division, debates on immigration and the #MeToo movement. There's also external
pressure. Many large LPs are pressuring their managers to increase employee diversity, in order to better
represent the demographic make-up of the pension holders or the values of the university endowment.
There's also the desire to perform better. Jeanette Bashford, global HR manager at Bloomberg, was
quoted in Bloomberg 8/28/17 saying, "When you have diversity of thought, and all types of education and
backgrounds come into play, then you can build amazing products and serve your clients better." What
this means in our space is avoiding some of the group-think that is harming profitability. How does
homogeneity of thought make bad business? Some people point to private equity firms chasing the same
corporate targets and driving up prices, banks putting downward pressure on their fees because they're
chasing the same limited number of IPO targets, and hedge funds making "consensus trades" that don't
allow them to be differentiated in their return profiles.
So what are people doing about getting more diverse workforces and greater diversity of thought? Here
we examine how a couple of areas of finance, the venture capital and hedge fund spaces, are addressing
the topic:
Hiring Changes in the Venture Capital World
Venture Capital firms in Silicon Valley have been frequently attacked for their homogeneous workforces,
especially in senior positions. And the stats bear it out: a 2016 survey from Deloitte and the National
Venture Capital Association found that of VC firm investment partners, 11% were women, 13% were
Asian, 2% Hispanic, and 0% black. Many believe the Silicon Valley harassment scandals that came to
light were driven by the gender imbalance in the industry (as detailed in the NYT 6/30/17).
Things are starting to shift, however. Greylock, Madrona, Redfin and other VCs came forward with a
campaign #DiverseFromTheStart, whose goal is to get more women and people of color onto the boards
of start-ups. The VCs are asking their portfolio companies to recruit an "Independent, diverse board
member" within two years of getting funded.
But as Melinda Gates, a vocal proponent of greater female representation, pointed out, "The gender gap
in VC isn't just a gap in who is receiving the funding - it's also a gap in who's doing the investing." Just last
month, in March 2018, more than 700 tech entrepreneurs and CEOs formed "Founders for Change," an
organization whose members have made a pledge to strongly consider a VC firm's gender and ethnic
makeup when seeking out investments. This coalition is putting pressure on VCs to take a close look at
the diversity of their staff, or risk losing out on some of the most potentially lucrative investments in the
Valley. Could Founders for Change make an impact on diversity in venture capital? Considering its
members consist of tech heavyweights Dropbox, Airbnb, and Lyft, there's a good chance this initiative
could move the needle.
The tech world has been a leader in encouraging diversity of thought as well as diversity of hiring. Steve
Jobs saw the value of having people from different backgrounds work together. When designing the new
HQ for Pixar, he supposedly located the large bathrooms in a central part of the building, far from
individual company segments. When employees had to make the trek to the bathroom, they'd start talking
to each other. The hope was that original and innovative ideas would come out of those random
interactions. I guess it's fair to say his company achieved that (this example and others in March 2018
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HBR article on Workplaces). We're watching to see how investment providers behind these firms can
become as forward-thinking.
Creativity within Hedge Fund Recruitment
The hedge fund industry has been particularly criticized for fostering a herd mentality. This is manifested
in "crowded trades," one of the most common explanations for poor hedge fund performance over the last
few years. What's driving this? Go to a hedge fund investment professional event and you'll see strong
patterns in educational background and professional history. Actually what you'll see is a lot of guys in
gingham shirts and company fleeces. Their similar life experiences, peer groups, and analyst training
experiences have led them to share similar world views and analyze opportunities in similar fashions,
goes the argument.
So how to go against the grain and avoid just hiring the obvious suspects? Bill Ackman early on at
Pershing Square hired his impressive fly-fishing guide as one of five analysts (colorfully described in
Forbes back in 6/29/12). Ackman said at the time, "I thought it was good to have someone out of the
mainstream." He went on to hire someone he met in a cab and his tennis pro to join the investment team.
But strategic hiring doesn't require HR heads to be travelling around town looking to interview their
doorman, Uber driver or barista. It normally means just pushing managers to interview people who might
not look like carbon copies of others at the firm. In the simplest dimension, there's gender. Women make
up very few of the senior investing ranks at funds. At multi-managers, fewer than 5% of portfolio
managers are female (even though women-led hedge funds outperformed their male-led counterparts by
2x in 2017) (Financial Times, 9/15/17). As a recruiting firm, we have increasing requests from clients to
ensure we're paying particular attention to under-represented categories when suggesting candidates.
Another way that some firms have been able to attract and recruit talent outside of the obvious Wall
Street feeder schools is to host investment competitions. A leading example is Citadel, which hosts
contests designed to recruit candidates in STEM. Called "datathons," these competitions attracts students
with technical backgrounds to compete for a cash prize. It's a great way to find people who might have
never before considered a job in the finance industry (described in "Why we Modeled our Hiring Process
on the NFL and NASA" by L.J. Brock and Justin Pinchback, HBR 1/25/18).
A source involved in assessing investment idea submissions told us, "I love the idea that the standout
person could end up being a grandmother in Iowa or a high-schooler in Kenya. Waving around an Ivy
League degree will get you nowhere - it's what you can do."
Currently these exercises skew more quantitative but that is evolving. The increased use of psychometric
and IQ tests like Caliper, Watson-Glaser and Wonderlic by fundamental hedge funds is solving for the
same thing - to level the playing field and focus on what matters. Jonathan Jones, the Head of Investment
Talent Development at Point72, is a leading proponent of this type of thinking. In a post on the website
Quora, he points out that some of the firm's most successful recent hires have come from fields ranging
from engineering to computer science to classics. He notes, "It's not about what you know going in, it's
about your capacity and drive to learn."
After all, proven modeling skills from a finance program with a solid reputation is ultimately a very small
part of determining who'll become the next Jamie Dimon or Steve Schwarzman. We foresee the resume
being a decreasingly important part of the puzzle over time - brands and grades are easy markers to
judge people by, but are mere blunt instruments. In our view, the push for diversity is actually helping us
get to the root of what talent actually is - which can only be a positive for the industry.
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Approaches to Hiring non-U.S. Employees
One of the foundations of the U.S. labor market has long been its adaptability; any shortage of
specialized skills could be readily alleviated via direct access to the global market for talent. However
recently there have been changes to immigration policy and how it's being enforced. These changes
include a stricter adherence to existing policy, additional visa diligence steps (elongating immigration
approvals), and a sharp reduction in visa grants.
We got in touch with a number of HR personnel and Hiring Managers in the alternatives space to see if
effects were being seen at the hiring level. The biggest take-away is that yes, changes are afoot. For
firms that regularly hire non-US staff, the minimum effect noticed is delays and more paperwork. One
Head of Recruiting for a $5Bn asset manager told us, "Slower times, more questions, audits, etc. is now
the new norm..."
But at some firms the effects are even more dramatic. Asking for total anonymity, one HR Head of a large
credit firm stated unequivocally, "We are hesitant to pursue any further visas, and we are no longer
sponsoring Analysts which we explain during the on-campus interview process."
So what's driving people to make decisions like this? Practically, work visas are now considerably
tougher to get. All told, there were 78,000 fewer visas granted in fiscal year 2017 than in the previous
year (WSJ 3/11/18). But there's also an emotional element. Many mentioned "increased uncertainty."
Given the lack of clarity on certain issues from the USCIS, immigration consultants and attorneys aren't
currently able to offer the same level confidence in their advice to their clients.
The most notable pull-back has been with H1B
visa applications, where firms are now showing
the most reluctance to pursue. There has
usually been challenges with this visa type
given the H1B lottery process, but these days,
the bar has been raised even higher. As noted
publicly, after alleged systemic abuses that
saw companies hiring international talent
below U.S. market salaries, government
scrutiny has increased. These issues may
have been more in the tech and outsourced IT
field, but the effects carry across all H1B
applicants. TN visas for Canadian citizens
have been seen as very straightforward to
obtain, but this visa category is linked to NAFTA participation, so we're hearing a lot of concern that these
visas have gone from being a near certainty to a discussion topic. On the other hand, we heard that there
were few issues with L-1s (intercompany company transfers), OPT/STEM (international students being
able to stay for some years following their degrees) and E-3 candidates (those from Australia, Chile and
Singapore who still receive preferable treatment with limited additional government involvement).
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Reactions to these challenges vary, though there is much disenchantment. One HR professional stated,
in a view echoed by many: "I only see the process getting a lot harder, more cumbersome and taking
more time." In many firms, rather than having a sweeping firm-wide policy, business units are being
allowed to decide whether to pursue immigration with their hiring. The thought being, as long as they
know the increased time and cost that could potentially be involved, then they're in the best position to
determine whether it makes sense to pursue visa support for a given candidate. Visa applications are
typically being reserved only for the most specialized, hardest-to-fill and "needle-moving" roles,
particularly on the investment side. We also heard that the larger, global firms are more likely to take on
visa support. Not only do they typically have great HR and legal resources, as well as more experience in
dealing with such cases, but they usually possess a useful plan B - a given hire can spend time in their
London or Hong Kong office before returning to the US, in the scenario of a visa application not being
granted. One C-level professional at a large firm mentioned that they just brought an analyst back to the
US from their Singapore office after three years of annual attempts in the H1B lottery.
Traditionally we see investment management firms looking for the best and most qualified candidates.
While that's still the case, the importance of "US work authorization" has increased. Green card holders
and even holders of current H1Bs are generally viewed equally alongside US citizens, but the challenge
is for those needing visa support. While there are difficulties, most firms are not giving up the fight, and
that's for practical, business reasons. One CAO put it like this: "Talent is at the core of our business.
We've always tried to hire meritocratically. We want to be blind to diversity categories in order to hire the
best people; equally if the right person for the role is from outside the US, we're not just going to sit back
and forego this whole talent pool."
Private Equity Moves
Note: We came across these moves in the course of our business; they do not include Odyssey placements, respecting the
confidentiality of our candidates and clients.
8
The Keys to Differentiation for Private Credit
The private credit market has abundant dry powder; too much capital, not enough deal flow, as total
capital allocated to private debt strategies reached $28.7B in 2017, a 57% rise from the prior year (as
quoted in Pensions & Investments 2/19/18 - though numbers are likely even higher, as some institutions
don't publicize their investments). Given this enormous capital influx, we're seeing funds looking to
differentiate their investment strategies in order to unearth new avenues of capital deployment.
Beyond standard practices (minimizing cost of capital, increasing fund size to invest in multiple markets),
we note five differentiating strategies that private credit firms are utilizing to put all that dry powder to use.
1) Diversifying Product Offerings - It's no secret that esoteric investment strategies are all the rage
(see our Q1 newsletter article on that very topic). ABL, Agriculture Tech, Aviation Investment and
Litigation Finance are just some of the alternative assets being touted as the 'next big thing' in Wall
Street's investment universe. Investors are attracted by compelling returns and lack of correlation to
traditional markets. Of course, funds need to consider the added diligence measures that come along
with an introduction to new markets. Perhaps that is why candidates with experience evaluating asset risk
and contracted cash flows are in such high demand these days. As one HR Manager from a special
situations fund told us, "Rather than just the best athletes, we are focused on hiring structured finance
professionals because of our push into ABF and esoteric securitized assets."
2) Focusing on Industries - While generalist funds tend to want to maintain their generalist status, some
are doing so while also focusing on a couple of niche sectors that will serve as the foundation of their
portfolio. Financial Services, Healthcare, Commodities and Technology are common examples; a specific
case would be middle market lender Golub Capital's renown expertise in Healthcare. The firm is
supplementing its vast portfolio with a niche industry that many feel has substantial room for growth,
which could also provide lending opportunities down the road.
3) Maintaining a Flexible Mandate - More and more firms are adopting an opportunistic credit model,
whereby they focus on illiquid private deals, yet remain nimble enough to engage in secondary deals
when the timing is right. For example, Falcon Investments Advisors is raising a dedicated Structured
Equity fund alongside traditional Junior Capital Funds (their core competency.) Special situations, junior
vs. senior debt, and sponsored/non-sponsored deals are ways that firms seem to be diversifying their
portfolio with a more flexible model.
4) Accessing Platform Benefits - Different types of financial services firms enjoy distinct benefits.
Private equity shops, for example, can speak directly to companies about liquidity issues, and rely on a
natural sourcing machine in the growth equity call center. Pensions, Fund of Funds, and other LPs have
access to sponsor deals that may never make it to other players' desks. For private credit firms looking to
scale, it makes sense to partner with outside shops in order to leverage their platform benefits. We see
many smaller private credit firms looking to partner with larger funds to help raise capital and provide
backend support. We've also noticed a hiring trend recently where large private equity and pension funds
are building out teams, typically of three to six credit professionals, to help provoke these types of
5) Being a Central Connector - Firms often come across interesting deals that unfortunately don't
comply with their current portfolio constraints. Rather than simply passing, some firms look at these as
opportunities to curry favor with industry peers. This can be achieved by providing the sponsor access to
lender alternatives, or even by passing the deal off to another lender directly. Acting as a central
connector not only differentiates the firm, but could provide opportunities down the road as others return
the favor. As Joe Burkhart, Managing Director at Saratoga Investment Advisors told us, "We are a
solutions-oriented lender. That means when an investment opportunity doesn't fit our mandate, we often
recommend other investment groups that may be a better fit. This helps us stand out in the market and
fosters a deeper relationship with our clients and industry peers."
The next challenge is actually delivering on these strategies. This requires the right personnel, and the
competition for talent is growing fiercer. But in the context of dry powder, growth, and an expanded
opportunity set, this is a challenge firms are aggressively looking to overcome as they seek to evolve. As
one Manager at a multibillion-dollar private credit fund stated, "The paradigm is shifting. Adaptation is key,
and those with the flexibility to adapt will find surer footing over the long term."
Private Credit Moves
Note: We came across these moves in the course of our business; they do not include Odyssey placements, respecting the
confidentiality of our candidates and clients.
10
Landing Your Top Choice Candidate
The hiring market for hedge funds and private equity firms
is as competitive as ever. Hiring firms are moving quickly,
spending lots of time with prospective candidates and
making very strong and sometimes very creative offers.
Likewise, candidates are making decisions based on more
than just quantitative factors such as salary, bonus, and
compensation progression. They are now placing
considerable weight on qualitative factors such as what
they will learn, whom they will interact with, firm reputation
and company culture. Additionally, the ability of candidates
to diligence firms via online platforms such as LinkedIn,
Wall Street Oasis and Glassdoor has significantly
transformed how candidates make career decisions by
opening up the 'black box' of these firms' inner workings.
However, most firms get so caught up in finding the best candidate, they forget that a candidate is also
trying to find the best firm. They tend to orient an interview process according to their own agenda and at
their own pace, without offering due consideration to the candidate's timetable. Only the most desired
firms can afford to act in this way; others that do so tend to find themselves frustrated with their hiring, as
candidates they decide they like fall out of the process.
So what can hiring firms do to help their cause and actually land their target candidates? It first requires a
mind-set change. Prospective candidates need to be seen as important, much like prospective LPs. Even
if a deal is not ultimately closed at this time, a good experience buys an option for the future and helps
brand perception in the marketplace. To help construct your most effective interview process, we drew
from our experience of arranging tens of thousands of interviews to compile this list of five best practices:
1) Always Be Closing - It's cliché, but it works. Promote the opportunity that the candidate is interviewing
for throughout the entire process, not just at the very end. Candidates generally perceive the interview
process as an indication of what it will be like to work at the firm, so the interview process should involve
two-way selling from the outset. Top-tier candidates are usually engaging multiple firms simultaneously,
so you don't want to wait for a Round 5 interview to start selling them; they might very likely get scooped
up by another firm before ever reaching that point. If you've built excitement from the get-go, they will
more likely see your process through to the end, regardless of other processes. Share with candidates
what about their experience/personality/attitude makes them a strong fit with your firm. Start painting the
picture early, and let them in on the finished product. As a practical guide, some firms break down a 45
minute first round into an initial 5-10 minutes of the interview talking about themselves, the firm and role,
30 minutes of questions to the candidate and then a final 5-10 of answering questions from the candidate.
Most candidates won't be invited to a second round, but the vast majority should come away with a
favorable impression of the firm.
2) Show Your Culture - When we query top candidates on their reasons for rejecting a potential
opportunity, one of the most common responses is that they've heard the company "is not a great place to
work," or that it has a "very tough culture." That's why it's so important to show a candidate exactly what
they'll be experiencing as a member of your team. Take candidates out for drinks and invite them to
speak with junior people to get a sense of who they'll be working with, and what the company culture is
like. Highlight the specific aspects of your culture that are unique and elicit excitement from candidates
during the early stages of the process to keep them coming back for more. Drive the talking points
particularly around redemptions and turnover. Candidates are also doing reference checks on you and it's
easier than ever to get hold of current and past employees. Get ahead of issues and show them your
culture instead; let those experiences do the talking.
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3) 'Who' Over 'How' - Most hiring firms focus on how to conduct an interview, while overlooking or
underplaying who at the firm is responsible for that undertaking. From a candidate's perspective, the 'who'
is at least as important as the 'how.' Remember, who candidates meet in the early and late rounds will
carry more weight than whom they interact with during the middle stages of the process. To that end,
don't put the driest or most direct interviewer in front of a candidate at the outset, as that could leave them
with a less than favorable first impression. Start off with someone warm, personable and outgoing; an
employee who is one of the strongest advocates for the firm, and then go from there. Another bonus is if
anyone at the firm has a personal connection with the candidate (same undergrad or MBA, same banking
group, from the same city, etc.) be sure to have them meet early in the process. If candidates forge a
strong relationship with at least one current employee, that will make them more comfortable throughout
the later stages, and offers them a sounding board for any questions/issues that arise.
4) Communication is Key - Communication is the cornerstone of any strong relationship, and the hiring
firm / candidate relationship is no different. Hiring Managers should be transparent about the entire
process ahead of time. Let the candidate know where they're headed before they get there, what to
expect at each turn, and try not to throw any curveballs (unless you're intentionally throwing them a
curveball to gauge their response). Additionally, be transparent about the job itself and your firm's
expectations. In the recruiting space, we're noticing a shift to retained over contingent firms partly driven
by this factor. You want a firm representing you in the market that takes the time to get to know you, and
to communicate about you appropriately in the candidate marketplace.
5) Stay in Touch - here's a scenario that happens all too frequently: We introduce a candidate that the
hiring firm loves. The firm wants to benchmark the person and "see who else is out there" before moving
anyone to later stages. Weeks go by. The firm then goes back to the initial candidate and there's surprise
and disappointment that the candidate is now involved with other firms and seems less interested.
Does this mean you need to make an offer to the first good candidate you find? No. But finding a way to continue to engage someone who you think has a reasonable chance of making it (by having them meet others, having check-in calls, doing diligence on each other etc.) significantly helps to maintain positive momentum. People forget that frequent touch points are the number one indicator of interest a firm can offer. Candidates typically have to invest considerable time and effort into a firm's interview process, with hours taken off work, preparing pitches, writing cases etc. and they're very sensitive to slow feedback and leaving large gaps in between touch points. Candidates typically assume the worst and mentally and practically start focusing elsewhere. So check-in, give updates, arrange additional meetings - in sum, continue to engage and give the impression that getting this person is a priority for the firm (which it probably is - it's just that there are ten other competing priorities at any given time!). Again, a good recruiting partner tries hard to "keep the candidate warm," but it's more effective and credible with real information to go on. In sum, the investment community is a small world. Everyone knows someone who knows someone who used to work for the firm they're interviewing with. Reputation is key, and the hiring process clearly begins before any candidate ever walks through the door. The best firms think about communication, culture, balance and closing from the word 'go,' and as a result are much more likely to land their ideal candidates. Firms that neglect this approach are still able to hire - but it's typically slower, more cumbersome and may require more dollars on the offer to seal the deal.
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News from Odyssey
We’re very happy to welcome Halley Cruice to the team! Halley joins Odyssey after two years at a NY-
based expert network firm where she supported private equity firms and hedge funds with research and
market intelligence. She grew up in Darien, Connecticut and was a Varsity Squash player at Trinity
